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Some books are harbingers of
shifts in public perceptions. I sensed
this would be the case as I read The
Price of Inequality by Economics
Nobel prizewinner Joseph Stiglitz
(Norton 2012 - 2013 Paperback). Stiglitz
served as chair of President Clinton’s
advisory committee and then with the
World Bank. This is a big book – 372
pages before footnotes. The first Chapter “America’s
1 Percent Problem” sets out the scale of
the economic inequality in the US in
some historical context: “Some thirty
years ago, the top 1 percent of income
earners received only
12 percent of the nation’s income…”
“ … by 2007… average after tax income of
the top 1 percent had reached $1.3
million, but that of the bottom 20
percent amounted to $17,800. … the top
0.1 percent received in a day and a half
what the bottom 90 percent received in a
year …” “… for the past thirty years the
top has been growing the fastest but the
bottom has actually been declining.”
The second Chapter on Rent
Seeking and the Making of an Unequal
Society begins asserting that American
inequality was created. Market forces
played a role, but government policies
shaped those forces. Government decides
what is fair competition and what
actions are uncompetitive and illegal;
who gets what in bankruptcy; and, by
taxation policies, how market income
gets distributed. Government alters the
time dynamics of wealth by inheritance
tax and by free public education.
Justification for inequality can be
traced to the “marginal productivity
theory” whereby those with higher
productivities could earn higher incomes
because of their greater contribution to
society. Stiglitz shatters some
economic mantras under “General
Principles.” He recalls Adam Smith’s
notion that the private pursuit of
self-interest would lead, as if by an
invisible hand, to the well-being of
all. No one today would argue that the
bankers’ pursuit of their self-interest
running up to 2008 led to the well-being
of all. He
notes bankers’ incentives were not well
aligned with social returns for all. Private
interests are not well aligned “when
competition is imperfect; when there are
‘externalities’ (where one party’s
actions can have large negative or
positive effects on others …); when
there exist imperfections of asymmetries
of information (where someone knows
something relative to a market trade
that someone else doesn’t know); or
where risk markets or other markets are
absent … [e.g. no insurance is
available].” He goes on: “Since one or
more of these conditions exist in
virtually every market, there is in fact
little presumption that markets are in
general efficient. This means that there
is an enormous potential role for
government to correct these market
failures.” This is not the wisdom we
were hearing. These insights form a
lengthy general introduction leading
towards the “rent” concept under a
heading “Moving money from the bottom to
the top of the pyramid.” “One
of the ways that those at the top make
money is by taking advantage of their
market and political power to favor
themselves, to increase their own income
at the expense of the rest. The
financial sector has developed expertise
in a wide variety of forms of rent
seeking … taking advantage of
asymmetries of information (for instance
selling securities that they had
designed to fail, but knowing that
buyers didn’t know that); taking
excessive risk – with the government
holding a lifeline, bailing them out and
assuming the losses … but the form of
rent seeking that is most egregious …
has been … to take advantage of the poor
and uninformed, as they made enormous
amounts of money by preying upon these
groups with predatory lending and
abusive credit card practices.” “Laws
governing corporations interact with
norms of behavior that guide the leaders
of those corporations and determine how
returns are shared among top management
and other stakeholders (workers,
shareholders, and bondholders). Finally there is a
definition of the notion of “Rent
Seeking”: “ …
hidden and open transfers from
government, laws that make the
marketplace less competitive, lax
enforcement of existing competition
laws, and statutes that allow
corporations for take advantage of
others or to pass the costs on to the
rest of society.” “Rent” started as income the
owner of land could get merely as a
result of ownership and in contrast with
wages paid to workers for the effort
provided. The concept has been extended
this to include monopoly profits such as
patents and then to similar situations.
If the government gives a company an
exclusive right to import a limited
amount (a quota) of say sugar, the extra
return from the ownership was called a
“quota rent.” Getting access to natural
resources on favourable terms is a form
of rent seeking. The heading “Government
Munificence” introduces ways governments
directly or indirectly give corporations
cash - the basis for rent. Government
procurement paying prices well above
costs is a standard form. If the
government grants the right to extract
natural resources like oil or gas for
free or for very little, it is easy to
make a fortune. Or rules can be
re-written to boost profits. In Chapter 3 Stiglitz points
out that the similar market situations
have led to very different levels of
economic inequality amongst developed
countries and different evolutions over
time. Governments shape market forces
but so do the social norms and the
social institutions. All these are
shaped by the 1%. Basically, if demand
increases more slowly than supply, wages
fall. But Stiglitz explores structural
changes which have effected supply and
demand: a shift away from manufacturing
with new jobs requiring new skills and
often not as well-paying; new
technologies calling for new skilled
workers and replacing unskilled workers
with machines. Stiglitz points out that
earlier educational initiatives such as
the GI Bill after WWII change skill
levels and allow workers to benefit from
an education. Changes increased demand
for those who mastered a technology and
reduced the demand for those who did
not. Globalization compounded these
structural effects. Stiglitz stresses
that this skill based change has little
to do with the enormous wealth at the
very top. Both trade globalization and
capital market globalization have
contributed to inequality but in
different ways and to different extents.
US financial institutions argued for
free mobility of capital and have
championed rights of capital over rights
of workers and even political rights.
Beyond the right not to be deprived of
their property, capital owners have
demanded the right to move freely into
and out of countries. But ... “As
a matter of simple economics, the
efficiency gains for world output from
free mobility of labor are much, much
larger than the efficiency gains from
the free mobility of capital.” When those in finance talk
about efficiency gains they seem to mean
a set of rules that benefits them and
increases their advantage over workers –
the threat of capital outflow keeps
wages low. There is competition across
countries for investment trying to
ensure regulations are weak and taxes
are low. Even the International Monetary
Fund has recognized the dangers of
freely moving capital – a problem in one
country can rapidly spread to another.
Trade globalization allows the movement
of goods to substitute for the movement
of people. “Having
succeeded in getting governments to set
the rules of globalization in ways that
enhance their bargaining power vis a vis
labor, corporations can then work the
political levers and demand lower
taxation.” Corporations make specious
arguments about how all will benefit.
Key parts to this contention are that
globalization will increase the
country’s overall output, and that
trickle down economics will ensure that
all will benefit. “Neither argument is
correct.” There can be an increase in
GDP, but not if for example workers
displaced by imports can’t find another
job. Moving from a low-productivity job
in a protected sector to unemployment
lowers national output. And even if
trade liberalization leads to a higher
overall output, large groups in the
population can still be worse off.
“…globalization hurts those at the
bottom not only directly but also
indirectly, because of the induced
cat-backs in social expenditures and
progressive taxation.” Stiglitz ends his chapter
with a look at changes in society beyond
market forces including: decline of
unions; permissive attitudes towards
executive enrichment in corporate
governance; government taxation levels
which have reduced tax for capital gains
and allow the rich to pay a lower tax
rate than those less well-off; no estate
taxes to prevent an inherited oligarchy;
access to education which is in fact
linked to wealth. Chapter 4 tells “Why it
Matters” for national output, economic
stability, economic efficiency and
growth. Moving money from the bottom to
the top lowers consumption because those
with higher-income consume a smaller
portion of their income. Without
something else, total demand will be
less than the economy can produce and
there will be unemployment. Since Keynes
governments have understood that when
there is a shortfall in demand – when
unemployment is high - they need to
increase either public or private
spending. Private consumption is
encouraged through tax cuts but this did
not work for repeated cuts by US
President George W Bush. The US Federal
Reserve has a mandate to maintain low
inflation, high growth and full
employment. It can counter weak demand
by low interest rates. But this brings
the danger of a “bubble” in which
households consume in an unsustainable
way on the basis of debt. If the bubble
breaks it can lead to a recession.
Stiglitz shows how this in fact
happened. Stiglitz claims that
politics driven by extremes of
inequality leads also to instability by
deregulation in finance. Regulations
ensure competition, prevent abuses,
protect those who cannot protect
themselves. Without restraints “market
failures are rampant.” In the financial
sector there will be conflicts of
interest and excesses, excess credit,
excess leverage, excess risk taking and
bubbles. Businesses tend to see short
term profit. Stiglitz develops the claim
that “High Inequality Makes for a less
Efficient and Productive Economy” by
examining reduction in broadly
beneficial public investment, “Massive
distortions” in the economy (rent
seeking), in law and in regulations, and
effects on worker morale.
Chapter
5, “A Democracy in Peril,” there is an
examination of the US democracy from
discrepancies between what voters want –
for example in financial regulations –
to how the 1 percent shape the rules of
the political game. This is more widely
instructive, but the most salient is the
section on globalization, inequality and
democracy. “… globalization, if managed
for the 1 percent, provides a mechanism
that simultaneously facilitates tax
avoidance and imposes pressures that
give the 1 percent the upper hand not
just in bargaining within a firm … but
also in politics.” “Increasingly, not only have
jobs been offshored but so, in a sense,
has politics.” “The surrender to the
dictates of the financial markets …
applies not only to those countries on
the brink of disaster but also to any
country that has to raise money from
capital markets.” It doesn’t have to be this
way. Financial markets can threaten to
pull money out of a country overnight
largely because of their total openness,
especially to short-term capital flows.
But in spite of the financial markte’r
ideological commitment to what is called
capital market liberalization (allowing
capital to move feely in and out of a
country) – an ideology consistent with
the markets’ self interest – in fact
such liberalization doesn’t promote
economic growth; it does, however, lead
to increased instability and
inequality.” “ As one of the world’s
leading experts on globalization, the
Harvard University professor Dani Rodrik
has pointed out, one cannot
simultaneously have democracy, national
sef-determination, and full and
unfettered globalization.” Chapter 6, “1984 is Upon Us”
shows how in a democracy where each
person has a vote, the 1 percent has
been so “victorious” in shaping policies
in its own interest. The chapter
contains some insights into modern
psychology and economics. Our
perceptions are influenced by framing.
Information consistent with prior
beliefs is seen as relevant. Perceptions
of inequality and fairness can influence
people. This chapter, too, is of wider
interest than the US. Stiglitz
concludes: “The
powerful try to frame the discussion in
a way that benefits their interests …
This chapter has shown that the wealthy
have the instruments, resources and
incentives to shape beliefs in ways that
serve their interests … the powerful
manipulate public perception by appeals
to fairness and efficiency, while the
real outcomes benefit only them.” Chapter 7 is entitled
“Justice for All? How Inequality is
Eroding the Rule of Law.” Let me give a
sampler from the concluding comments.
“The need for a strong rule of law is
widely accepted … In designing the
systems of laws and regulations … there
are trade-offs: some laws and
regulations favour one group, others
another. We have examined several
examples where … the laws and
regulations and how they were
implemented and enforced, reflect the
interests of the top layer of society
more than those of the people in the
middle and at the bottom.” As Stiglitz
notes “justice for all” is becoming
“justice for those who can afford it.” “The Battle of the Budget,”
Chapter 8 is an analysis of the US
budget story which may affect many of us
in countries which trade with the US.
The whole story is fascinating, but I
will focus on Stiglitz’s refreshing
thoughts about “Austerity.” “The
worst myths are that austerity will
bring recovery and that more government
spending will not.” The argument runs that the
business world, seeing the government’s
books are in better shape, will
supposedly feel more confident and
invest. Stiglitz shows how, on this
basis, advocates of the austerity myth
should support his strategy for recovery
– higher public investment. He also
looks to history and shows “austerity
has almost never worked.” He
explains; “Recessions are caused by a
lack of demand … When the government
cuts back on spending demand is lowered
even more, and unemployment increases.” There
is
another strong section: “Underlying
the myth that austerity will brind
confidence is often another myth – the
myth that the national government’s
budget is like a houshold’s budget.
Every household sooner or later has to
live within its means. When an economy
has high unemployment, the simple rule
does not apply to the national budget.
This is because an expansion of spending
can actually expand production by
creating jobs that will be filled by
people who would otherwise be
unemployed. A single household, ny
spending more that its revenues, cannot
change the macro economy. A national
government can. And the increase in GDP
can be a multiple of the amount spent by
government.” Chapter 9 “A Macroeconomic
Policy and a Central Bank by and for the
1 Percent” continues the analysis of the
US “Great Recession” of 2008, but with
some useful insights for lay people into
macroeconomic policy. Macroeconomic
policy deals with the overall economic
activity, output (GDP), employment,
interest rates and inflation. It greatly
affects the distribution of income.
Policy makers’ most important
responsibility is economic stability.
Stiglitz alleges that “some of the
policy choices simultaneously increased
inequality – benefiting those at the top
– and hurt the economy.” Many choices
are more complicated and involve
trad-offs. Pursuing lower inflation
means higher unemployment; lower
unemployment means high inflation and
bondholders see the value of their
assets erode. Stiglitz
points
out that inflation can be a problem, but
for over a third of a century it has not
been a serious problem for the US and
Western Europe. High unemployment hurts
those who depend on working for their
living.
He shows how things get
progressively worse towards “those at
the bottom.” The central bankers theme
has pressed for lowering wages and
especially minimum wages and job
protections. The lack of job protections
then led to a perverse economic
situation because: “The
central economic problem in the Great
Recession … is the lack of total (or
aggregate) demand. With
good systems of social protection,
workers’ income and consumption are
sustained, even in the face of a
downward ‘shock’ to the economy.
Economists refer to these shock
absorbers as automatic stabilizers.” Stiglitz then shows how the
policy of low interest rates had little
useful effect. It may have helped the
banks, but “all those retired
individuals who had invested prudently
in government bonds suddenly saw their
incomes disappear.” … “a
large transfer of wealth from the
elderly to the government, and from the
government to the bankers.” In his critique of
deregulation and the weak new regulation
legislation is another gem: “…
there emerged a broad consensus among
economists and policy makers (including
a least one Federal Reserve regional
governor and the governor of the Bank of
England, Mervyn King) that something
ought to be done about the
too-big-to-fail banks. King pointed out
that if they were too big to fail, they
were too big to exist.” He
concludes his chapter: “We cannot have a
monetary system that is run by people
whose thinking is captured by the
bankers and that is effectively run for
the benefit of those at the top.” Chapter 10 “The Way Forward:
Another World is Possible” aims to build
a more efficient economy and a fairer
society with more opportunity, a higher
national income, a stronger democracy
and higher living standards for most
individuals by making markets work like
markets – more competitive, less
exploitive and tempering their excesses.
Some section headings give the flavour:
Stiglitz concludes with a
mixture of possible ways forward and
corresponding seemingly overwhelming
difficulties. I have some critique but
it will have to wait for more time than
this simple presentation.
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